With the Ethereum Merge Event Just a Few Hours Away, the Probability of a “Sell the News” Type of Move Is Decreasing


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Ethereum (ETH) has officially captured the wider financial world as it prepares to undergo one of its most significant upgrades ever. Such is the magnitude of interest around the upcoming merge event that Google is now displaying a countdown to the seminal event.

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As a refresher, the upcoming merge event will formalize Ethereum’s transition from a Proof-of-Work (PoW) transaction authentication mechanism, where miners expend computational power to win the right to authenticate incoming transactions, to one based on a Proof-of-Stake (PoS) framework, where validators lock up a specific amount of Ethereum in dedicated nodes in order to compete with each other to authenticate transactions and introduce new blocks into the chain. The transition will reduce Ethereum’s energy footprint by around 99 percent.

Moreover, the merge might also pave the way for the world’s second-largest cryptocurrency to become deflationary, at least for a while. Vitalik Buterin had claimed back in July that the annual issuance of ETH would be equal to 166 times the square root of the number of staked coins after the merge. As of this moment, 13.642 million Ethereum coins have been staked on the Beacon Chain. By applying Buterin’s calculations, the annual issuance of Ethereum based on the current staked level equates to 613,137.31 ETH or 1,679.82 ETH per day. Now, over the past 7 days, 9,881 ETH were burnt, equating to a daily burn rate of 1,411.57 ETH. This means that based on the current dynamics, Ethereum will add just 268.25 ETH tokens to its net supply every day, and might even become deflationary in the days ahead should its burn rate – determined via Ethereum’s base fee – increases as network activity picks up.

This brings us to the crux of the matter. As Ethereum’s merge event approaches, some investors have been betting on a “sell the news” type of move in the immediate aftermath. This is understandable given Ethereum’s substantial outperformance relative to Bitcoin in recent weeks. In anticipation of such a move, these investors have been withdrawing capital from Ethereum and deploying it toward Bitcoin, resulting in marked weakness in Ethereum/Bitcoin cross price in recent days, as illustrated in the chart below:

Paradoxically, the lower Ethereum’s price goes relative to Bitcoin in the pre-merge phase, the higher would be the probability of evading a disorderly liquidation in the post-merge phase. This means that in pre-empting a “sell the news” type of move, such investors are hurting the probability of their bearish bets actually materializing.

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Meanwhile, the sentiment around Ethereum seems to have improved just ahead of the upcoming merge event. As an illustration, Santiment’s NVT model, which measures the ratio between unique ETH coins being moved and Ethereum’s market capitalization, is currently in its best state in around 16 months:

Do you think Ethereum will be able to evade price weakness in the immediate aftermath of the merge event? Let us know your thoughts in the comments section below.

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